##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from            to
 Commission file number: 000-50805
 HINES REAL ESTATE INVESTMENT TRUST, INC.
 (Exact Name of Registrant as Specified in its Charter)
 Maryland
    
    20-0138854(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)2800 Post Oak BoulevardSuite 5000Houston, Texas
    
    77056-6118(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (888) 220-6121
  þ o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (Unaudited)Consolidated Condensed Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    2Consolidated Condensed Statements of Operations for the Three and Six Months Ended
June 30, 2006 and 2005
    
    
    3Consolidated Condensed Statement of Shareholders Equity for the Six Months Ended
June 30, 2006 and the Year Ended December 31, 2005
    
    
    4Consolidated Condensed Statements of Cash Flows for the Six Months Ended
June 30, 2006 and 2005
    
    
    5Notes to Consolidated Condensed Financial Statements for the Six Months Ended
June 30, 2006 and 2005
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II  OTHER INFORMATIONItem 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURES
    
    
    36Advisory AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906
  1




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements (Unaudited).
 HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 As of June 30, 2006 and December 31, 2005
 (UNAUDITED)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSInvestment property, at cost:Buildings and improvements, net
    
    $
    337,636,324
    
    
    $
    79,461,108In-place leases, net
    
    
    89,597,008
    
    
    
    25,698,679Land
    
    
    110,604,578
    
    
    
    38,416,834Total investment property
    
    
    537,837,910
    
    
    
    143,576,621Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    162,018,389
    
    
    
    118,574,523Cash and cash equivalents
    
    
    9,003,126
    
    
    
    6,156,285Restricted cash
    
    
    3,770,882
    
    
    
    Distributions receivable
    
    
    3,168,303
    
    
    
    3,598,103Straight-line rent receivable
    
    
    1,344,567
    
    
    
    276,726Tenant and other receivables
    
    
    1,672,906
    
    
    
    807,813Forward interest rate swap
    
    
    1,907,677
    
    
    
    Acquired above-market leases, net
    
    
    30,293,679
    
    
    
    15,099,578Deferred offering costs
    
    
    3,029,144
    
    
    
    1,221,987Deferred leasing costs, net
    
    
    2,014,317
    
    
    
    1,655,534Deferred financing costs, net
    
    
    1,882,611
    
    
    
    851,206Other assets
    
    
    11,446,395
    
    
    
    5,515,934TOTAL ASSETS
    
    $
    769,389,906
    
    
    $
    297,334,310LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable and accrued expenses
    
    $
    16,241,927
    
    
    $
    4,280,492Unaccepted subscriptions for common shares
    
    
    10,085
    
    
    
    1,168,441Due to affiliates
    
    
    7,172,612
    
    
    
    10,855,669Acquired below-market leases, net
    
    
    13,559,716
    
    
    
    8,719,488Other liabilities
    
    
    2,591,565
    
    
    
    902,246Participation interest liability
    
    
    6,800,932
    
    
    
    3,021,780Dividends payable
    
    
    6,144,848
    
    
    
    3,001,754Distributions payable to minority interests
    
    
    259,683
    
    
    
    207,243Notes payable
    
    
    275,830,223
    
    
    
    74,900,000Total liabilities
    
    
    328,611,591
    
    
    
    107,057,113Minority interest
    
    
    1,454,555
    
    
    
    2,192,831Commitments and ContingenciesShareholders equity :Preferred shares, $.001 par value; 500 million preferred shares authorized, none issued or
outstanding as of June 30, 2006 and December 31, 2005
    
    
    
    
    
    
    Common shares, $.001 par value; 1,500,000,000 common shares authorized as of
June 30, 2006 and December 31, 2005; 53,149,096 and 23,046,119 common shares
issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
    
    
    53,149
    
    
    
    23,046Additional paid-in capital
    
    
    464,013,247
    
    
    
    199,846,230Retained deficit
    
    
    (24,742,636
    )
    
    
    (11,784,910
    )Total shareholders equity
    
    
    439,323,760
    
    
    
    188,084,366TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    769,389,906
    
    
    $
    297,334,310
  2




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 For the Three and Six Months Ended June 30, 2006 and 2005
 (UNAUDITED)
 Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Rental revenue
    
    $
    15,920,300
    
    
    $
    47,609
    
    
    $
    23,996,558
    
    
    $
    47,609Other revenue
    
    
    573,445
    
    
    
    
    
    
    
    890,756
    
    
    
    Total revenues
    
    
    16,493,745
    
    
    
    47,609
    
    
    
    24,887,314
    
    
    
    47,609Expenses:Property operating expenses
    
    
    4,517,269
    
    
    
    20,600
    
    
    
    7,146,190
    
    
    
    20,600Real property taxes
    
    
    2,672,705
    
    
    
    
    
    
    
    3,684,778
    
    
    
    Property management fees
    
    
    390,288
    
    
    
    
    
    
    
    599,686
    
    
    
    Depreciation and amortization
    
    
    5,779,770
    
    
    
    12,701
    
    
    
    8,825,599
    
    
    
    12,701Asset management and acquisition fees
    
    
    4,667,174
    
    
    
    1,616,616
    
    
    
    7,558,304
    
    
    
    2,270,734Organizational and offering expenses
    
    
    1,527,176
    
    
    
    
    
    
    
    1,659,849
    
    
    
    1,479,923General and administrative expenses
    
    
    918,083
    
    
    
    569,238
    
    
    
    1,527,534
    
    
    
    1,349,341Total expenses
    
    
    20,472,465
    
    
    
    2,219,155
    
    
    
    31,001,940
    
    
    
    5,133,299Loss before equity in (losses) earnings, interest expense
and loss allocated to minority interests
    
    
    (3,978,720
    )
    
    
    (2,171,546
    )
    
    
    (6,114,626
    )
    
    
    (5,085,690
    )Equity in (losses) earnings of Hines-Sumisei
U.S. Core Office Fund, L.P.
    
    
    (812,315
    )
    
    
    44,549
    
    
    
    (913,203
    )
    
    
    15,605Gain on forward interest rate swap
    
    
    1,355,677
    
    
    
    
    
    
    
    1,355,677
    
    
    
    Interest expense
    
    
    (5,268,336
    )
    
    
    (39,100
    )
    
    
    (7,772,713
    )
    
    
    (39,100
    )Interest income
    
    
    149,191
    
    
    
    3,515
    
    
    
    233,167
    
    
    
    5,079Loss allocated to minority interests
    
    
    132,393
    
    
    
    266,928
    
    
    
    253,972
    
    
    
    971,872Net loss
    
    $
    (8,422,110
    )
    
    $
    (1,895,654
    )
    
    $
    (12,957,726
    )
    
    $
    (4,132,234
    )Basic and diluted loss per common share:Loss per common share
    
    $
    (0.21
    )
    
    $
    (0.24
    )
    
    $
    (0.38
    )
    
    $
    (0.76
    )Weighted average number
common shares outstanding
    
    
    41,077,789
    
    
    
    7,928,701
    
    
    
    34,053,215
    
    
    
    5,466,449
  3




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS EQUITY
 For the Six Months Ended June 30, 2006 and the Year Ended December 31, 2005
 (UNAUDITED)
 AdditionalPreferred
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    Paid-In
    
    
    Retained
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Equity (Deficit)BALANCE,
January 1, 2005
    
    
    
    
    
    $
    
    
    
    
    2,073,116
    
    
    $
    2,073
    
    
    $
    9,715,539
    
    
    $
    (10,028,316
    )
    
    $
    (310,704
    )Issuance of common
shares
    
    
    
    
    
    
    
    
    
    
    20,973,003
    
    
    
    20,973
    
    
    
    207,642,319
    
    
    
    
    
    
    
    207,663,292Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,637,079
    )
    
    
    
    
    
    
    (6,637,079
    )Selling commissions
and dealer manager
fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,055,143
    )
    
    
    
    
    
    
    (15,055,143
    )Other offering
costs, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,180,594
    
    
    
    
    
    
    
    4,180,594Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,756,594
    )
    
    
    (1,756,594
    )BALANCE,
December 31, 2005
    
    
    
    
    
    
    
    
    
    
    23,046,119
    
    
    
    23,046
    
    
    
    199,846,230
    
    
    
    (11,784,910
    )
    
    
    188,084,366Issuance of common
shares
    
    
    
    
    
    
    
    
    
    
    30,134,154
    
    
    
    30,134
    
    
    
    299,350,617
    
    
    
    
    
    
    
    299,380,751Redemption of
common shares
    
    
    
    
    
    
    
    
    
    
    (31,177
    )
    
    
    (31
    )
    
    
    (280,562
    )
    
    
    
    
    
    
    (280,593
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,132,115
    )
    
    
    
    
    
    
    (10,132,115
    )Selling commissions
and dealer manager
fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,722,876
    )
    
    
    
    
    
    
    (22,722,876
    )Other offering
costs, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,048,047
    )
    
    
    
    
    
    
    (2,048,047
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,957,726
    )
    
    
    (12,957,726
    )BALANCE,
June 30, 2006
    
    
    
    
    
    $
    
    
    
    
    53,149,096
    
    
    $
    53,149
    
    
    $
    464,013,247
    
    
    $
    (24,742,636
    )
    
    $
    439,323,760
  4




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 For the Six Months Ended June 30, 2006 and 2005
 (UNAUDITED)
 Six Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (12,957,726
    )
    
    $
    (4,132,234
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    9,848,426
    
    
    
    34,853Non-cash compensation expense
    
    
    15,469
    
    
    
    23,676Equity in losses (earnings) of Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    913,203
    
    
    
    (15,605
    )Distribution received from Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    
    
    
    
    84,066Loss allocated to minority interests
    
    
    (253,972
    )
    
    
    (971,872
    )Accrual of organizational and offering expenses
    
    
    1,659,849
    
    
    
    1,479,923Gain on forward interest rate swap
    
    
    (1,355,677
    )
    
    
    Changes in assets and liabilities:Increase in other assets
    
    
    (278,491
    )
    
    
    (90,548
    )Increase in straight-line rent receivable
    
    
    (1,067,841
    )
    
    
    Increase in tenant and other receivables
    
    
    (795,614
    )
    
    
    Increase in deferred lease costs
    
    
    (562,361
    )
    
    
    Increase in accounts payable and accrued expenses
    
    
    4,195,752
    
    
    
    319,599Increase in participation interest liability
    
    
    3,779,152
    
    
    
    1,135,367Decrease in other liabilities
    
    
    694,665
    
    
    
    Increase in due to affiliates
    
    
    1,138,119
    
    
    
    225,545Net cash provided by (used in) operating activities
    
    
    4,972,953
    
    
    
    (1,907,230
    )CASH FLOWS FROM INVESTING ACTIVITIES:Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
    
    
    (50,640,000
    )
    
    
    (63,258,787
    )Distributions received from Hines-Sumisei U.S. Core Office Fund, L.P.
in excess of equity in (losses) earnings
    
    
    6,712,731
    
    
    
    1,080,910Investments in property
    
    
    (300,651,542
    )
    
    
    (45,497,700
    )Additions to other assets
    
    
    (10,000,000
    )
    
    
    Increase in restricted cash
    
    
    (3,770,882
    )
    
    
    Increase in acquired out-of-market leases, net
    
    
    (10,335,379
    )
    
    
    (13,049,438
    )Net cash used in investing activities
    
    
    (368,685,072
    )
    
    
    (120,725,015
    )CASH FLOWS FROM FINANCING ACTIVITIES:Decrease in escrowed investor proceeds
    
    
    
    
    
    
    100,000Decrease in escrowed investor proceeds liability
    
    
    
    
    
    
    (100,000
    )Increase (decrease) in unaccepted subscriptions for common shares
    
    
    (1,158,356
    )
    
    
    234,062Proceeds from issuance of common stock
    
    
    295,134,002
    
    
    
    75,942,901Redemption of common shares
    
    
    (280,593
    )
    
    
    Payments of selling commissions and dealer manager fees
    
    
    (23,876,198
    )
    
    
    (5,445,867
    )Payments of organizational and offering expenses
    
    
    (9,800,000
    )
    
    
    (2,500,000
    )Proceeds from advances from affiliate
    
    
    1,666,878
    
    
    
    1,141,800Payments on advances from affiliate
    
    
    (1,095,000
    )
    
    
    Dividends paid to shareholders
    
    
    (2,807,601
    )
    
    
    (300,476
    )Dividends paid to minority interests
    
    
    (431,860
    )
    
    
    (245,629
    )Proceeds from notes payable
    
    
    393,500,000
    
    
    
    60,000,000Payments on notes payable
    
    
    (281,400,000
    )
    
    
    Increase in forward interest rate swap
    
    
    (522,000
    )
    
    
    Additions to deferred financing costs
    
    
    (2,370,312
    )
    
    
    (300,000
    )Net cash provided by financing activities
    
    
    366,558,960
    
    
    
    128,526,791Net change in cash and cash equivalents
    
    
    2,846,841
    
    
    
    5,894,546Cash and cash equivalents, beginning of period
    
    
    6,156,285
    
    
    
    1,536,439Cash and cash equivalents, end of period
    
    $
    9,003,126
    
    
    $
    7,430,985Supplemental Disclosure of Cash Flow InformationCash paid for interest
    
    $
    6,738,894
    
    
    $
    Supplemental Disclosure of Non-Cash ActivitiesUnpaid selling commissions and dealer manager fees
    
    $
    
    
    
    $
    732,633Deferred offering costs offset against additional paid-in capital
    
    $
    2,048,047
    
    
    $
    1,140,567Accrual of deferred offering costs
    
    $
    3,029,144
    
    
    $
    Distributions receivable
    
    $
    3,168,303
    
    
    $
    1,616,925Dividends declared and unpaid
    
    $
    6,144,457
    
    
    $
    1,091,813Distributions declared and unpaid to minority interests
    
    $
    259,683
    
    
    $
    181,141Dividends reinvested
    
    $
    4,181,420
    
    
    $
    333,325Assumption of mortgage upon acquisition of property
    
    $
    88,494,864
    
    
    $
    Non-cash assets acquired upon acquisition of property
    
    $
    5,349,308
    
    
    $
    1,236,546Accrual additions to investment property
    
    $
    2,246,448
    
    
    $
    Accrual of deferred financing costs
    
    $
    13,523
    
    
    $
    58,301
  5




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
 1. Organization
 The accompanying interim unaudited consolidated condensed financial information has been prepared
according to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
have been condensed or omitted according to such rules and regulations. For further information,
refer to the financial statements and footnotes for the year ended December 31, 2005 included in
Hines Real Estate Investment Trust, Inc.s Annual Report on Form 10-K . In the opinion of
management, all adjustments and eliminations, consisting only of normal recurring adjustments,
necessary to present fairly and in conformity with GAAP the financial position of Hines Real Estate
Investment Trust, Inc. as of June 30, 2006 and December 31, 2005, the results of operations for
the three and six months ended June 30, 2006 and 2005 and the cash flows for the six months ended
June 30, 2006 and 2005 have been included. The results of operations for such interim periods are
not necessarily indicative of the results for the full year.
  Public Offerings
    Minority Interests
  Investment Property
  6




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
  2. Summary of Significant Accounting Policies
 Basis of Presentation
   Investment Property
      7




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
  Cash and Cash Equivalents
  Deferred Leasing Costs
  Other Assets
  June 30,
    
    
    December 31,2006
    
    
    2005Property acquisition escrow deposit
    
    $
    
    
    
    $
    5,000,000Prepaid insurance
    
    
    325,449
    
    
    
    110,155Mortgage loan deposits
    
    
    940,000
    
    
    
    Forward interest rate swap deposit
    
    
    10,000,000
    
    
    
    Other
    
    
    180,946
    
    
    
    405,779Total
    
    $
    11,446,395
    
    
    $
    5,515,934
 Deferred Financing Costs
  Forward Interest Rate Swap
   8




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
    Unaccepted Subscriptions for Common Shares
  Due to Affiliates
  June 30,
    
    
    December 31,2006
    
    
    2005Organizational and offering costs related to the Initial Offering
    
    $
    150,323
    
    
    $
    6,900,000Organizational and offering costs related to the Current Offering
    
    
    3,942,753
    
    
    
    1,477,732Dealer manager fees and selling commissions
    
    
    
    
    
    
    1,108,398Asset management, acquisition fees and property-level fees and
reimbursements
    
    
    1,462,612
    
    
    
    324,493General, administrative and other expenses
    
    
    1,616,924
    
    
    
    1,045,046Total
    
    $
    7,172,612
    
    
    $
    10,855,669
 Organizational and Offering Costs
 Initial Offering
    9




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
   Current Offering
  Revenue Recognition
  Stock-based Compensation
 Share-Based Payment,
 10




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
  Income Taxes
   Per Share Data
  3. Real Estate Investments
 Direct Investments
    Acquired
    
    
    AcquiredBuildings and
    
    
    In-Place
    
    
    Above- Market
    
    
    Below-MarketImprovements
    
    
    Leases
    
    
    Leases
    
    
    LeasesCost
    
    $
    340,956,856
    
    
    $
    98,405,024
    
    
    $
    32,700,954
    
    
    $
    15,233,766Less: accumulated depreciation and
amortization
    
    
    (3,320,532
    )
    
    
    (8,808,016
    )
    
    
    (2,407,275
    )
    
    
    (1,674,050
    )Net
    
    $
    337,636,324
    
    
    $
    89,597,008
    
    
    $
    30,293,679
    
    
    $
    13,559,716
  11




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
 Acquired
    
    
    AcquiredBuildings and
    
    
    In-Place
    
    
    Above- Market
    
    
    Below-MarketImprovements
    
    
    Leases
    
    
    Leases
    
    
    LeasesCost
    
    $
    79,999,888
    
    
    $
    28,489,886
    
    
    $
    16,207,234
    
    
    $
    9,075,427Less: accumulated depreciation and
amortization
    
    
    (538,780
    )
    
    
    (2,791,207
    )
    
    
    (1,107,656
    )
    
    
    (355,939
    )Net
    
    $
    79,461,108
    
    
    $
    25,698,679
    
    
    $
    15,099,578
    
    
    $
    8,719,488
   In-place
    
    Out-of-MarketLeases
    
    Leases, netJuly 1 through December 31, 2006
    
    $
    8,496,681
    
    
    $
    219,3112007
    
    
    15,863,086
    
    
    
    494,7882008
    
    
    14,261,916
    
    
    
    627,7952009
    
    
    12,269,042
    
    
    
    1,501,9052010
    
    
    6,979,097
    
    
    
    1,253,791
  Fixed FutureMinimum RentalsJuly 1 through December 31, 2006
    
    $
    22,468,7632007
    
    
    47,947,9742008
    
    
    42,695,2752009
    
    
    33,192,1272010
    
    
    25,922,028Thereafter
    
    
    105,304,587Total
    
    $
    277,530,754
  Investment in Hines-Sumisei U.S. Core Office Fund, L.P.
   12




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
    Consolidated Condensed Balance Sheets of the Core Fund
as of June 30, 2006 and December 31, 2005
(unaudited)
 June 30, 2006
    
    
    December 31, 2005ASSETSCash
    
    $
    42,575,536
    
    
    $
    42,044,377Property, net
    
    
    1,661,605,996
    
    
    
    1,382,492,862Other assets
    
    
    297,459,471
    
    
    
    275,102,476Total Assets
    
    $
    2,001,641,003
    
    
    $
    1,699,639,715LIABILITIES AND PARTNERS CAPITALDebt
    
    $
    1,091,805,000
    
    
    $
    915,030,000Other liabilities
    
    
    115,406,511
    
    
    
    106,125,932Minority interest
    
    
    282,296,475
    
    
    
    260,929,015Partners capital
    
    
    512,133,017
    
    
    
    417,554,768Total Liabilities and Partners Capital
    
    $
    2,001,641,003
    
    
    $
    1,699,639,715
 Consolidated Condensed Statements of Operations of the Core Fund
For the Six Months Ended June 30, 2006 and 2005
(unaudited)
 June 30, 2006
    
    
    June 30, 2005Revenues and interest income
    
    $
    121,301,255
    
    
    $
    93,412,871Operating expenses
    
    
    (56,255,842
    )
    
    
    (41,344,390
    )Interest expense
    
    
    (28,312,874
    )
    
    
    (22,028,008
    )Depreciation and amortization
    
    
    (36,190,363
    )
    
    
    (26,107,486
    )Minority interest
    
    
    (3,507,823
    )
    
    
    (3,929,302
    )Net Income (Loss)
    
    $
    (2,965,647
    )
    
    $
    3,685
  13




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
 
    
    13% and 15%, respectively, was earned from two tenants in the oil and gas industry that
are affiliated with each other, whose leases expire on December 31, 2015; and
    
    38% and 39%, respectively, was earned from several tenants in the legal services
industry, whose leases expire at various times during the years 2007 through 2027.
   4. Debt Financing
 Revolving Credit Facility
   Term Loan
  Debt Secured by Investment Property
  14




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
    5. Dividends
   Dividends For the Quarter Ended
    
    Date Paid
    
    Total DividendsJune 30, 2006
    
    July 14, 2006
    
    $
    6,144,848March 31, 2006
    
    April 13, 2006
    
    $
    3,987,267December 31, 2005
    
    January 13, 2006
    
    $
    3,001,754September 30, 2005
    
    October 14, 2005
    
    $
    2,008,861June 30, 2005
    
    July 15, 2005
    
    $
    1,091,813March 31, 2005
    
    April 7, 2005
    
    $
    534,652December 31, 2004(1)
    
    January 14, 2005
    
    $
    99,149
 
 (1)
    
    The Company commenced operations on November 23, 2004. Dividends for
the quarter ended December 31, 2004 were declared for the period from November
23, 2004 through December 31, 2004.  6. Related Party Transactions
 Advisory Agreement
  Acquisition Fees
 15




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
  Asset Management Fees
 Expense Reimbursements
 Dealer Manager Agreements
  Property Management and Leasing Agreements
  
    
    A property management fee equal to the lesser of 2.5% of the annual gross revenues
received from the properties or the amount of property management fees recoverable from
tenants of the property under the leases. The Company incurred property management fees of
approximately $390,000 and $600,000 for the quarter and six months ended June 30, 2006,
respectively. As of June 30, 2006 and December 31, 2005, the Company had a liability for
incurred and unpaid property management fees of approximately $233,000 and $31,000,
respectively, which has been included in due to affiliates in the accompanying consolidated
condensed balance sheets. The Company purchased its first direct real estate investment on
June 28, 2005, and accordingly, incurred no property management fees for the quarter or six
months ended June 30, 2005.
    
    A leasing fee of 1.5% of gross revenues payable over the term of each executed lease
including any lease renewal, extension, expansion or similar event and certain construction
management and re-development construction management fees, in the
 16




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HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
 event Hines renders such services. The Company incurred leasing commissions of approximately
$11,000 and $22,000 for the quarter and six months ended June 30, 2006, respectively, and had
an outstanding liability as of June 30, 2006 of approximately $5,000 related to such costs.
The Company incurred no leasing, construction management or redevelopment fees during the
quarter or six months ended June 30, 2005.
    
    The Company reimburses Hines for certain operating costs incurred in providing property
management and leasing services pursuant to the property management and leasing agreements.
The Company incurred reimbursable expenses of approximately $1.0 million and $1.5 million
for the quarter and six months ended June 30, 2006. These amounts, net of payments,
resulted in liabilities of approximately $568,000 and $100,000 as of June 30, 2006 and
December 31, 2005, respectively, which have been included in the accompanying consolidated
condensed balance sheets. The Company incurred no reimbursable expenses for the quarter or
six months ended June 30, 2005.
 The Participation Interest
   7. Commitments and Contingencies
   8. Subsequent Events
 Acquisition of One Atlantic Center
  17




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, continued
For the Six Months Ended June 30, 2006 and 2005
(UNAUDITED)
 Capital Contribution to the Core Fund
  Current Public Offering
  New Credit Facility with HSH Nordbank
     18




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Explanatory Note
 The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our unaudited consolidated condensed financial statements, the notes
thereto, and the other unaudited financial data included elsewhere in this Form 10-Q . The following
discussion should also be read in conjunction with our audited consolidated financial statements,
and the notes thereto, and Managements Discussion and Analysis of Financial Condition and Results
of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2005.
 Cautionary Note Regarding Forward-Looking Statements
    
    
    Our ability to invest offering and dividend reinvestment plan proceeds to acquire
properties or other investments in a timely manner and at appropriate amounts that provide
acceptable returns;
    
    The potential need to fund tenant improvements, lease-up costs or other capital
expenditures, as well as increases in property operating expenses and costs of compliance
with environmental matters or discovery of previously undetected environmentally hazardous
or other undetected adverse conditions at our properties;
    
    Risks associated with debt;
    
    Competition for tenants and real estate investment opportunities, including competition
with affiliates of Hines Interests Limited Partnership (Hines);
    
    Risks associated with adverse changes in general economic or local market conditions,
including terrorist attacks and other acts of violence, may affect the markets in which we
and our tenants operate;
    
    Catastrophic events, such as hurricanes, earthquakes and terrorist attacks; and our
ability to secure adequate insurance at reasonable and appropriate rates;
    
    Changes in governmental, tax, real estate and zoning laws and regulations and the
related costs of compliance and increases in our administrative operating expenses,
including expenses associated with operating as a public company;
 19




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
    
    Risks relating to our investment in Hines-Sumisei U.S. Core Office Fund, L.P. (the Core
Fund), such as its reliance on Hines for its operations and investments, and our potential
liability for Core Fund obligations;
    
    The lack of liquidity associated with our assets;
    
    Our reliance on our Advisor, Hines and affiliates of Hines for our day-to-day operations
and the selection of real estate investments, and our Advisors ability to attract and
retain high-quality personnel who can provide service at a level acceptable to us;
    
    Risks associated with conflicts of interests that result from our relationship with our
Advisor and Hines, as well as conflicts of interests certain of our officers and directors
face relating to the positions they hold with other entities; and
    
    Our ability to continue to qualify as a real estate investment trust (REIT) for
federal income tax purposes.
   Executive Summary
   20




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
  Leasable
    
    Percent
    
    Ownership byProperty
    
    Market
    
    Square Feet
    
    Leased
    
    the Company(1)Direct Investments:Citymark
    
    Dallas, Texas
    
    
    218,096
    
    
    
    100
    %
    
    
    100.00
    %1515 S Street
    
    Sacramento, California
    
    
    348,881
    
    
    
    100
    %
    
    
    100.00
    %1900 and 2000 Alameda
    
    San Mateo, California
    
    
    253,377
    
    
    
    74
    %
    
    
    100.00
    %Airport Corporate Center
    
    Miami, Florida
    
    
    1,018,477
    
    
    
    94
    %
    
    
    100.00
    %321 North Clark
    
    Chicago, Illinois
    
    
    885,664
    
    
    
    94
    %
    
    
    100.00
    %Indirect Investments:Three First National Plaza
    
    Chicago, Illinois
    
    
    1,419,010
    
    
    
    92
    %
    
    
    21.77
    %333 West Wacker
    
    Chicago, Illinois
    
    
    843,023
    
    
    
    95
    %
    
    
    21.72
    %425 Lexington Avenue
    
    New York, New York
    
    
    700,034
    
    
    
    100
    %
    
    
    11.88
    %499 Park Avenue
    
    New York, New York
    
    
    288,184
    
    
    
    88
    %
    
    
    11.88
    %600 Lexington Avenue
    
    New York, New York
    
    
    280,043
    
    
    
    99
    %
    
    
    11.88
    %1200 19th Street
    
    Washington D.C.
    
    
    235,404
    
    
    
    100
    %
    
    
    11.88
    %One Shell Plaza
    
    Houston, Texas
    
    
    1,227,889
    
    
    
    95
    %
    
    
    13.61
    %Two Shell Plaza
    
    Houston, Texas
    
    
    565,157
    
    
    
    93
    %
    
    
    13.61
    %The KPMG Building
    
    San Francisco, California
    
    
    379,328
    
    
    
    96
    %
    
    
    27.21
    %101 Second Street
    
    San Francisco, California
    
    
    388,370
    
    
    
    99
    %
    
    
    27.21
    %525 B Street
    
    San Diego, California
    
    
    427,449
    
    
    
    88
    %
    
    
    27.21
    %720 Olive Way
    
    Seattle, Washington
    
    
    286,437
    
    
    
    82
    %
    
    
    21.72
    %9,764,823
    
    
    
    93
    %
 
 (1)
    
    This percentage shows the effective ownership of the Operating Partnership in
the properties listed. As of June 30, 2006, Hines REIT owned a 96.67% interest in the
Operating Partnership and was its sole general partner. Affiliates of Hines owned the
remaining 3.33% interest in the Operating Partnership. Real estate investments owned
100% by the Operating Partnership are referred to as direct investments. We own
interests in the properties shown as indirect investments through our interest in the
Core Fund, in which we owned an approximate 29.25% non-managing general partner interest
as of June 30, 2006. The Core Fund does not own 100% of these buildings; its ownership
interests in its buildings ranged from 40.6% to 93.0% as of June 30, 2006.  Critical Accounting Policies
  Basis of Presentation
  21




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
  Investment Property
       Deferred Leasing Costs
  Organizational and Offering Costs
 Miscellaneous Accounting  Expenses of Offering Reporting on the Costs of
Start-up Activities.
 22




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
    Revenue Recognition and Valuation of Receivables
  Forward interest rate swap
    Treatment of Management Compensation, Expense Reimbursements and Operating Partnership
Participation Interest
  23




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 Implementation Issues Related to the Treatment of Minority Interests in Certain Real Estate
Investment Trusts.
 Accounting for Costs and Initial Rental Operations of Real Estate Projects.
 Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases.
  Financial Condition, Liquidity and Capital Resources
  
    
    proceeds from our public offerings, including our dividend reinvestment plan;
    
    proceeds from debt financings, including secured or unsecured facilities;
    
    cash flow generated by our real estate investments and operations; and
    
    advances from affiliates.
 Sources of Funds
 Our public offerings
     24




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
  Debt financings
   Our Revolving Credit Facility
   Our Term Loan
  Debt Secured by our Properties
   25




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
  Cash flow from real estate investments and operations
   Advances from affiliates
   Uses of Funds
 Real Estate Investments
   26




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
  Payment of Offering and Other Costs and Expenses
     Property Management and Leasing Agreements
  
    
    A property management fee equal to the lesser of 2.5% of the annual gross revenues
received from the properties or the amount of property management fees recoverable from
tenants of the property under the leases. We incurred property management fees of
approximately $390,000 and $600,000 for the quarter and six months ended June 30, 2006,
respectively. As of June 30, 2006 and December 31, 2005, we had a liability for incurred
and unpaid property management fees of approximately $233,000 and $31,000, respectively,
which has been included in due to affiliates in the accompanying consolidated condensed
balance sheets. We acquired our first directly-owned property on June 28, 2005, and
accordingly, incurred no property management fees for the quarter or six months ended June
30, 2005.
 27




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 
    
    A leasing fee of 1.5% of gross revenues payable over the term of each executed lease
including any lease renewal, extension, expansion or similar event and certain construction
management and re-development construction management fees, in the event Hines renders such
services. We incurred leasing commissions of approximately $11,000 and $22,000 for the
quarter and six months ended June 30, 2006, respectively, and had an outstanding liability
of approximately $5,000 as of June 30, 2006 related to such costs. We incurred no leasing,
construction management or redevelopment fees during the quarter or six months ended June
30, 2005.
    
    We reimburse Hines for certain operating costs incurred in providing property management
and leasing services pursuant to the property management and leasing agreements. We
incurred reimbursable expenses of approximately $1.0 million and $1.5 million for the
quarter and six months ended June 30, 2006, respectively. These amounts, net of
repayments, resulted in liabilities of approximately $568,000 and $100,000 as of June 30,
2006 and December 31, 2005, respectively, which have been included in the accompanying
consolidated condensed balance sheets. We incurred no reimbursable expenses for the quarter
or six months ended June 30, 2005.
 Dividends
    Dividends for theQuarter Ended
    
    Date Paid
    
    Total DividendsJune 30, 2006
    
    July 14, 2006
    
    $
    6,144,848March 31, 2006
    
    April 13, 2006
    
    $
    3,987,267December 31, 2005
    
    January 13, 2006
    
    $
    3,001,754September 30, 2005
    
    October 14, 2005
    
    $
    2,008,861June 30, 2005
    
    July 15, 2005
    
    $
    1,091,813March 31, 2005
    
    April 7, 2005
    
    $
    534,652December 31, 2004(1)
    
    January 14, 2005
    
    $
    99,149
 
 (1)
    
    We commenced operations on November 23, 2004. Dividends for the quarter
ended December 31, 2004 were declared for the period from November 23, 2004 through
December 31, 2004.     28




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
     Results of Operations
  Direct Investments
  Our Interest in the Core Fund
  29




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
   Asset Management and Acquisition Fees
  General, Administrative and Other Expenses
   Gain on the Forward Interest Rate Swap
  Interest Expense
  30




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##### Table of Contents



HINES REAL ESTATE INVESTMENT TRUST, INC.
 Loss Allocated to Minority Interests
  Off-Balance Sheet Arrangements
  Subsequent Events
 Acquisition of One Atlantic Center
  Capital Contribution to the Core Fund
  Current Public Offering
  New Credit Facility with HSH Nordbank
  31




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HINES REAL ESTATE INVESTMENT TRUST, INC.
    32




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
     
 Item 4. Controls and Procedures.
    33




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##### Table of Contents



PART II- OTHER INFORMATION
 
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   Maximum Number (orTotal Number of
    
    Approximate DollarTotal
    
    
    
    
    
    Shares Purchased as
    
    Value) of Shares thatNumber of
    
    Average Price
    
    Part of Publicly
    
    May Yet be PurchasedShares
    
    Paid per Share
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    Programs
    
    Programs(1)April 1, 2006 to
April 30, 2006
    
    
    24,134
    
    
    
    9.00
    
    
    
    24,134
    
    
    
    191,665May 1, 2006 to
May 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191,665June 1 to
June 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,121,129Total
    
    
    24,134
    
    
    
    9.00
    
    
    
    24,134
 
 (1)
    
    Under the terms of the Initial Offering, the number of shares
available for redemption was limited to the lesser of 5% of the number of common shares
outstanding at the end of the prior year or the total number of shares purchased pursuant
to the dividend reinvestment plan. Under the terms of the Current Offering, the limitation
based on the total number of shares purchased pursuant to the dividend reinvestment plan
was removed.   34




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##### Table of Contents



Type of Expense
    
    AmountUnderwriting discounts and commissions
    
    $
    27,960,115Other expenses paid to affiliates
    
    
    27,245,352Total expenses
    
    $
    55,205,467
   
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 6. Exhibits.
  35




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##### Table of Contents



SIGNATURES
  HINES REAL ESTATE INVESTMENT TRUST, INC.August 14, 2006
    
    By:
    
    /s/ Charles M. BaughnCharles M. BaughnChief Executive OfficerAugust 14, 2006
    
    By:
    
    /s/ Sherri W. SchugartSherri W. SchugartChief Financial Officer
 36




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of Hines Real
Estate Investment Trust, Inc. (filed as Exhibit 3.1 to Amendment
No. 5 to the registrants Registration Statement on Form S-11,
File No. 333-108780, on May 25, 2004 and incorporated herein by
reference).3.2
    
    Second Amended and Restated Bylaws of Hines Real Estate
Investment Trust, Inc. (filed as Exhibit 3.1 to the registrants
Current Report on Form 8-K, on August 3, 2006 and incorporated
herein by reference).10.1
    
    Deed of Trust, Security Agreement and Fixture Filing, dated as
of April 18, 2006, by and between Hines REIT 1515 S Street LP,
First American Title Insurance Company and MetLife Bank, N.A.,
and Promissory Notes, dated April 18, 2006, executed by Hines
REIT 1515 S Street LP. (Filed as Exhibit 10.59 to Amendment No.
1 to the registrants Registration Statement on Form S-11, File
No. 333-130,114 (the Registration Statement), on April 25,
2006, and incorporated herein by reference).10.2
    
    Term Loan Agreement, dated as of April 24, 2006, between Hines
REIT Properties, L.P., KeyBank National Association and the
other Lenders party thereto, and Promissory Note executed by
Hines REIT Properties, L.P., dated April 24, 2006. (Filed as
Exhibit 10.60 to Amendment No. 1 to the Registration Statement,
on April 25, 2006, and incorporated herein by reference).10.3
    
    Unconditional Guaranty of Payment and Performance of Hines Real
Estate Investment Trust, Inc. in favor of KeyBank National
Association, dated April 24, 2006. (Filed as Exhibit 10.61 to
Amendment No. 1 to the Registration Statement, on April 25,
2006, and incorporated herein by reference).10.4
    
    Ownership Interests Pledge and Security Agreement of Hines REIT
Properties, L.P., dated April 24, 2006. (Filed as Exhibit 10.62
to Amendment No. 1 to the Registration Statement, on April 25,
2006, and incorporated herein by reference).10.5
    
    Subordination Agreement, dated April 24, 2006, among Hines REIT
Properties, L.P., Hines Advisors Limited Partnership, Hines
Interests Limited Partnership and KeyBank National Association.
(Filed as Exhibit 10.63 to Amendment No. 1 to the Registration
Statement, on April 25, 2006, and incorporated herein by
reference).10.6
    
    Contract of Sale by and between Sumitomo Life Realty (N.Y.),
Inc. and Hines One Atlantic Center LP, dated May 18, 2006.
(Filed as Exhibit 10.64 to Amendment No. 2 to the Registration
Statement, on June 19, 2006, and incorporated herein by
reference).10.7
    
    Agreement by and between Hines REIT Properties, L.P. and HSH
Nordbank AG New York Branch dated June 5, 2006. (Filed as
Exhibit 10.65 to Amendment No. 2 to the Registration Statement,
on June 19, 2006, and incorporated herein by reference).10.8*
    
    Advisory Agreement, dated June 26, 2006, by and among Hines Real
Estate Investment Trust, Inc., Hines REIT Properties, L.P., and
Hines Advisors Limited Partnership.31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C., Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to
SEC Release 34-47551 this Exhibit is furnished to the SEC and
shall not be deemed to be filed.
 
 *
    
    Filed herewith 37